OldTown faces heightened competition amidst a deteriorating macroeconomic environment. Downgrade to SELL (from Neutral) with a lower MYR1.16 TP (from MYR1.47, 12% downside) by pegging FY16F EPS to 11x P/E, the company’s historical -1SD trading band. The challenging operating environment caps its 3-year earnings CAGR to an uninspiring 4%.

Counting on fast-moving consumer goods (FMCG). OldTown’s FMCG wing is increasingly its earnings driver, offering greater revenue growth and more attractive margins vs its food & beverage (F&B)segment (Figures 5 and 7). However, competition within the white coffee market has heightened in recent years, with giants Nestle Malaysia (NESZ MK, NEUTRAL, TP: MYR68.60), Power Root (PWRT MK, NR)and Super (SUPER SP, SELL, TP: SGD0.77) looking to exert their ownvariants. As a result, revenue growth is slowing, while marginsexpansion has tapered off amidst greater spending on promotion as it looks to maintain its foothold in an increasingly competitive market.

Challenging F&B operating environment. We are mindful that the operating environment would be challenging on the intensified competitive market structure, which has seen operating margins gradually decline (Figure 4). This is further compounded by our view that consumer spending recovery could take longer than expected to kick in,given the USD’s recent strengthening that led to end users bearing higher costs.

Forecasts and risks. We fine-tune our FY17F-18F earnings by 6%/7% at both its FMCG and F&B segments on the intensified competition and consumer spending slowdown. Key risks to our investment case: i) faster-than-expected consumer spending recovery, ii) favourable currency trends, and iii) lower-than-expected raw material prices.

Downgrade to SELL. We expect growth in both F&B and FMCG to remain soft amid stiff competition, underpinned by heightened macroeconomic headwinds. We are mindful that its customer base is more susceptible to rising living costs. Hence, we downgrade to SELL (from Neutral) with a lower MYR1.16 TP (from MYR1.47), by pegging a target 11x P/E from 14x (-1SD from its historical average) to FY16F EPS, considering the insipid growth outlook (3-year earnings CAGR of 4%). Our valuation using DCF implies the same valuation (Figure 8).